scenario analysis Archives

“I’m afraid of what I don’t know,” the CEO of the rapidly growing company said to me as I advised him one day.

“And I’m afraid of what I can’t see.”

He feared dire circumstances could occur and wipe out his thriving company.

This CEO was worried enough that he longed for a good early warning system he could use…if there were a way to create one.

I created an early warning system for him, one we ended up calling the “edge of cliff analysis” because it addressed his key fears for his company…and a few others he had not thought about.

It was a tool he and the company reached for, and used, for years afterwards.

To create the “edge of cliff analysis,” and to make sure it worked well for them, I worked with a wide range of people at the company to understand serious and unexpressed fears they had for their company.

It was like uncovering and understanding a high-risk puzzle, and then providing an action-oriented dashboard to guide them.

It helped them prioritize improvements that would reduce the most likely risks to the company, while providing them significant measures, and the ability to use them well, in order to help them know if problems were starting to emerge.

And then we made sure the decision-making and prioritization framework is one that people inside the company could and would use. (And they continued to reach for and use it, I heard through the grapevine, for years afterwards).

Do you, too, long for a sense of command in otherwise challenging and unpredictable circumstances?

Do you ever wish for an early warning system such as this CEO did?

If so, here are the basic steps we used to create this rapidly growing company’s early warning system:

– Start with your fears

We called this the “edge of cliff” analysis, and started with the CEO’s greatest fears.

He had lived with heavy but ambiguous worry for some time.

He hadn’t yet articulated his fears clearly, and this step alone, of articulating his worries, helped turn them into something actionable, and something positive.

– Turn them into scenarios

We considered his worst-case scenarios and the probable consequences of each for his clients and company.

We also considered best-case scenarios (they are so much more fun to think about…and we needed those, too, for a bit of relief in this work).

And then we considered what would happen if the best scenarios turned out, in real life, to be even better than we dreamt. We also considered situations where something far, far worse than the worst that he feared happened.

This stretched our sense of what the early warning system needed to accommodate, and to flag for preventative, or adaptive action.

– Make your early warning system goal clear

Identify what you want your early warning system to do for you.

Next, consider who will use the information, and what they will hopefully do with it.

Check in with the future users of the information to see what they need in order to make the information easy for them to use to identify and take the right actions.

– Gather external information

In this client project, I had to find a proxy for customer satisfaction and frustrations, in lieu of talking directly to their customers.

I looked to see what promises the company made, or implied, to their customers through their marketing and advertising materials.

This told me what processes inside the company had to work flawlessly, under all different circumstances, no matter what was happening outside the company.

– Synthesize

Working with the leadership team, I verified and clarified which processes had to be top-notch in order for them to continue to thrive.

We mapped this to the most likely scenarios they might face, and identified which processes put them at highest risk, if they were not strengthened and improved.

– Organize and communicate

We organized and simplified the work, making it easy to understand and use.

We had no interest in creating a system that just looked good on paper. We wanted one that would be successful in real life and real business.

Next, we trained people, helping them see what valuable part they played in making the early warning system work successfully, and do what it was intended to do to keep the company safe and thriving.

The early warning system turned out to be a combination of crystal ball, fire drill, and strategic change management system all rolled into one.

If you’d like more information about how to do a scenario analysis, or how to do an “edge of cliff” analysis for your business, let me know.

Here’s another post you may be interested in:

You place your bets when you set strategy

Have you ever been blindsided, whether by difficult circumstances or by opportunity?

Many people around the world would answer “Yes!” to that question, given recent events, who might previously have said, “Hmmm, let me try to think of an example…”

Consider a big surprise in your career or personal life, whether positive or negative.

If you had anticipated and been ready for it, would that have affected the decisions or actions you took when the surprise occurred?

Be better prepared the next time changes are sharp and sudden.

Scenario analysis, a simple planning tool, can help you.

It may sound complicated, but it’s not.

In its simplest possible form, scenario analysis is a brainstorming tool.

It works because it loosens your grip on the future you expect.

It opens your eyes to many possible futures, and helps you prepare for seemingly far-fetched circumstances that can, in fact, become real.

The process of building scenarios increases the quality of your planning, and improves your responsiveness.

It helps your team consider, and work through many different possibilities. It also heightens awareness of cues and data you can monitor to anticipate, notice important changes that are occurring, and then to be prepared for whatever happens.

As you envision each scenario, you’re essentially beginning to rehearse how you’d handle each circumstance.

Here’s a simple approach to use scenario planning:

Prepare

1. Define the problem.

What’s your challenge, in one sentence?

2. List the primary forces that could drive change in the situation.

For example, is availability of qualified employees critical to your team or company?

Are economic trends, regulatory issues, industry or technology trends important to you – or could they be?

What other major forces must you monitor and be ready to respond to quickly, and well, as changes occur in each of them?

3. Create a matrix.

You’ll need at least six columns. You’ll also need enough rows for each of the primary forces you identified that could drive significant change in this situation.

In the first column, list each of the primary forces, one per row, that you identified.

Across the top of the matrix, write these column headers: “Even better case,” “Best case,” “Most likely case,” “Worst case,” “Even worse case” in columns two through six.

Be there

4. Imagine, one by one, that you’re in the middle of three different scenarios, “Best case,” “Most likely case,” and “Worst case.”

As you consider each scenario, write a few details in the appropriate boxes for what you expect would be happening with each driving force in that circumstance.

For example, let’s say you’re planning for rapid growth at your company. One force you would need to consider in that case is the availability of qualified candidates for jobs at your company.

Let’s say, then, that you anticipate the best case is that there will always be as many highly-qualified candidates as you need.

As a worst case, perhaps you fear that major demographic changes could reduce or even eliminate future job candidates for the jobs you anticipate having available.

And as a most likely case, perhaps you think there will be little change in the number, and quality, of job candidates available to you.

5. Stretch even further.

Now, having considered the “Best case,” “Most likely case,” and “Worst case,” expand your thinking.

What circumstance would be EVEN BETTER than what you imagined for each driving force?

And what would be EVEN WORSE than what you already dared to picture?

Working through these extreme outcomes inevitably leads you to new insights. Many companies find that creating these stress scenarios…both good and bad…accelerate and improve their preparation, teamwork, trust, and resilience.

6. Build the most likely scenario.

Having considered the extreme examples, what now seems to be the most likely scenario?

Is it the same “Most likely” scenario you originally envisioned?

The odds are very high that, having stretched your thinking, you see some new areas of caution and, also, opportunity.

And that the “Most likely” scenario now looks different.

Save and compare

By this point, you may have accomplished as much as you want to with this simple version of scenario analysis.

You can do further work, if desired, such as by gathering data and doing detailed analysis to help you understand which scenario you envision is most likely…or if there are forces, or scenarios you also need to consider.

7. Save your work.

Whether you’re ready to complete the scenario analysis, or you’re doing more research, save the work you’ve done for later use.

8. Express key scenarios in a way that makes them easy to use.

You can capture the scenarios in some way that makes them easy to use and refer to in the future, such as through simple graphics or drawings. You can select a metaphor, or write a phrase that expresses the anticipated circumstance succinctly.

9. Later, when time has passed and change has occurred, compare what actually happened with the scenarios you imagined…and what you thought might happen.

You might be surprised at the quality of the crystal ball you create with this simple exercise, and how well-prepared you are, as a result, for what actually occurs.

Considering many different possibilities prepares you to some degree to be ready for them…and makes you more attentive to the key forces that may be constantly changing.

One client, an investment management firm, discovered after we used scenario planning there, that they were far better prepared for volatile financial markets than some of their competitors were.

However you plan and prepare for the future, rest assured that it won’t be a simple extension of the past.

Scenario analysis can help you be much better prepared for the future, and more resilient.

Categories

How to create an “edge of cliff” scenario analysis to prevent big problems from occurring

Strategic planning: Mine your imagination with scenario planning